Troubled Debt Restructuring and Extinguishment (F5:M6)

Question 1

when a debtor transfers assets for the purpose of restructuring troubled debt, there are two different g/l. what are they and how are they calculated?

Answer 1

gain from the restructuring:
CV of payable - FV of assets transferred

gain or loss on disposition of asset:
FV of asset transferred - NBV of asset transferred

Question 2

when a debtor transfers an equity interest for the purpose of restructuring troubled debt, how is the gain calculated?

Answer 2

CV of the payable - FV of equity transferred

Question 3

when assets or equity interest is transferred, what happens to the debt? What if nothing is actually transferred?

Answer 3

it is extinguished

debt is not extinguished, terms have simply been modified

Question 4

from the creditor’s perspective, how is the loan impairment loss determined? (modification of terms)

Answer 4

by finding the loan’s PV of expected future cash flows discounted at the loan’s HISTORICAL effective interest rate.

pre-restructure CV - PV restructured cash flows

Question 5

on the creditor’s books, how is the troubled debt restructuring (loan impairment loss) recorded? (modification of terms)

Answer 5

bad debt exp (d)
valuation allowance (c)